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Medicare Hospital Reimbursement. University of Michigan Health System presented by Thomas Marks Director, Hospital Accounting&Reimbursement. Institutional Hospital inpatient medical/surgical psychiatric rehabilitation long-term, childrens, cancer Hospital outpatient

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Medicare hospital reimbursement l.jpg

Medicare Hospital Reimbursement

University of Michigan

Health System

presented by Thomas Marks

Director, Hospital Accounting&Reimbursement

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Hospital inpatient




long-term, childrens, cancer

Hospital outpatient

Skilled nursing facility


Ambulatory surgery center

Other Providers


Clinical laboratory

Physical/speech/occ therapy

End stage renal dialysis

Ambulance (ground and air)

Durable medical equipment

Home infusion

Home health agency

Medicare Payment Systems

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Topics to Cover

  • Brief historical perspective

  • Medicare inpatient PPS

    • DRGs - Disproportionate share

    • Area wage adjustments - Direct GME

    • Indirect medical education - Organ acquisition

  • Medicare outpatient PPS

    • APCs, structure and payment rules

    • HOPD status

  • Settlements

  • Medicare policy issues

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Historical Perspective

In the beginning, there was the cost report.



Lab fees &

esrd rate



Cost reimbursement









Prospective rates and fee for service

now prevail.

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Historical Perspective (continued)

  • What remains as cost-reimbursed:

    • inpatient psychiatric (although subject to a cap)

    • organ acquisition

  • “Cost” is still important in Medicare policy

    • All payment systems are benchmarked to cost in the aggregate

    • Some payment systems provide extensive payment differentiation based on cost differences

    • Cost data is used to set weights and rates for prospective payments

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Inpatient Payment

  • DRG-based payment =adjusted rate x DRG relative weight

    • Operating and capital components are separate but similar

    • Psych and rehab units are excluded

  • Adjusters:

    • area wage index

    • indirect medical education (IME)

    • disproportionate share (DSH)

  • Additional payments:

    • outliers

    • direct graduate medical education (GME)

    • organ acquisition

    • bad debts

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DRG Payments

  • DRG structure

    • Currently 528 DRGs, intended to be groupings of clinically-similar diagnoses and procedures

    • Medical DRGs - generally based on principal diagnosis

    • Surgical DRGs - generally based on principal procedure

    • Complications/commorbidities and patient age may also be factors

  • DRG Relative Weights

    • Average cost of cases in a DRG compared to average cost for all cases

    • Cost derived from charges on Medicare claims

    • Generally, a three-year lag between claims data (used to set weights) and payment dates

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DRG Payments - Weights

Examples of Medicare DRGs and Weights

001 Craniotomy age > 17, with CC 3.7399

002 Craniotomy age > 17, w/out CC 1.9730

003 Craniotomy age 0-17 1.9504

134 Hypertension 0.5877

143 Chest pain 0.5391

389 Full-term neonate with major problems 3.1648

390 Neonate with other significant problems 1.1201

480 Liver transplant 10.3805

483 Tracheostomy except face/neck/mouth dx 17.0510

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DRG Payments - Documentation

  • All inpatient cases coded by Medical Information Systems

  • Cannot code what is not in the medical record

  • Importance of documentation

    • All procedures must be defined

    • Existence of complications

    • Existence of commorbidities

  • Several initiatives are underway to improve documentation

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Area Wage Index

  • What does it pay for?

    • Differences in cost of living (wage levels) impact cost per case

  • Methodology:

    • Each hospital reports wage, benefit and worked hour data annually

    • Average compensation per hour computed for each metro area

    • Each metro area assigned an Area Wage Index value

    • Labor portion of DRG rate (about 71%) is adjusted

  • Examples:

    Ann Arbor 1.1103 New York 1.4414

    Grand Rapids 0.9548 Hattiesburg MS 0.7441

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Indirect Medical Education (IME)

  • Why does it exist?

    • Teaching hospitals have higher costs

    • IME is intended to level the playing field

    • Statistical correlation between teaching intensity and cost per case

    • Ratio of residents to beds is used to measure teaching intensity

  • What does it pay for?

    • Patient severity and complexity not adequately addressed by DRGs

    • New technology and standby capacity

    • Inefficiencies, as residents provide much of the care

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IME - Formula

  • Methodology:Resident to bed ratio converted to a % add-on to the rate

  • Formulaas of 10/1/02: ((1+R/B)^.405 - 1) x 1.35 = IME

  • Examples:Hospital 1Hospital 2Hospital 3 (UM)

    FTE residents 10 100 635

    Available beds 200 400 680

    R/B ratio .05 .25 .93

    IME percentage 2.7% 12.8% 41.3%

    DRG rate 4,500 4,500 4,500

    IME rate adjustment 121 576 1,858

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All trainees in approved programs - residents, fellows

Rotations in most inpatient and outpatient hospital facilities

Rotations in non-hospital, offsite locations if all costs borne by hospital (per contract)

Research rotations involving patient care


Trainees in unapproved programs

Rotations in exempt psych and rehab units

Rotations in other hospitals

Rotations in offsite locations where no contract exists

Bench research rotations

Time not adequately documented

IME - Resident Count

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IME - Other Rules

  • Balanced Budget Act changes

    • Cap on allowable FTE: resident count cannot exceed 1996 base year

    • Three-year rolling average: Resident FTE is based on the capped count for the current and two most recent years

    • UM experience: have exceeded 1996 cap each year since 2000

  • Available beds

    • Staffed beds excluding psych unit, rehab unit, nursery and observation

    • Closed beds excluded: need to show that beds cannot open in 72 hours

    • UM experience: opening a bed decreases IME by $50,000

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Disproportionate Share (DSH)

  • What does it pay for?

    • Hospitals with high indigent patient volumes incur more costs, and incur more uncompensated care

    • DSH is a supplemental payment to help defer these higher costs and losses

  • Methodology:

    • “Indigent” patient days divided by total patient days = DSH percentage, converted to a percentage add-on to the DRG payment.

    • “Indigent” is defined as...

      • Patients enrolled in Medicaid Title 19

      • Medicare patients eligible for Supplemental Security Income (SSI)

    • Excludes Title 5, county indigent care recipients, uninsured

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DSH (continued)

  • Formula:

    • DSH percentage > 20.2%: ((DSH % - .202) x .825) +.0588

    • DSH percentage > 15%: ((DSH % - .15) x .65) + .0250

  • Example:Hospital 1Hospital 2 (UM)

    DSH percentage 20.0% 25.0%

    Threshold 15.0% 20.2%

    Over threshold 5.0% 4.8%

    DSH add-on 5.7% 9.8%

    DRG rate 4,500 4,500

    DSH rate 259 441

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Outlier Payments

  • What does it pay for?

    • Individual cases may have very high costs

    • Outlier payment provides partial recovery of costs not covered by DRG

  • Methodology:

    • Charges converted to cost using hospital’s cost-to-charge ratio (CCR)

    • Cost is compared to a threshold: DRG payment + fixed threshold

    • Cost > threshold is reimbursed 80%

  • Example:

    • Charges=$150,000, CCR=0.50, DRG pymt=$10,000, threshold=$33,560

    • Cost: $75,000 (150,000 charges x 0.50 ccr)

    • Threshold: $43,560 (10,000 drg payment + 33,560 threshold)

    • Outlier payment: (75,000-43,560) x 80% = $25,152

    • Total payment for this case: DRG (10,000)+outlier (25,152) = $35,152

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Direct GME

  • What does it pay for?

    • Direct GME is intended to cover the direct costs of approved residency programs:

      • resident salaries and benefits

      • faculty supervision and teaching

      • other direct costs and overhead allocable to GME

  • Methodology:hospitals receive a fixed amount per resident FTE, multiplied by Medicare % of patient days

    • Fixed amount is hospital specific, based on 1985 cost per resident

    • Medicare % of patient days includes days for patients enrolled in Medicare managed care plans

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Direct GME (continued)

  • FTE Count:Same as IME except...

    • Bench research, and rotations in psych and rehab units are included

    • Residents beyond initial residency period are counted at 50% (fellows)

      Subject to 1996 cap

      Based on three-year rolling average

  • UM Experience, FY2002:

    • Resident FTE, unadjusted 748 FTE

    • Impact of initial residency period limit -108 FTE

    • Resident FTE, adjusted 630 FTE

    • Capped, three-year rolling average 603 FTE

    • Medicare payment per adjusted FTE $20,282

    • Medicare cost per adjusted FTE $34,943

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Organ Acquisition Cost

  • What does it pay for?

    • Covers all organ procurement activities:

      • purchases from organ procurement agency

      • excision from live donors and cadavers

      • transportation, preservation

      • administrative support

    • Also covers pre-transplant evaluations of prospective recipients/donors

      • clinic visits, tissue typing, diagnostic testing

  • Methodology - cost reimbursement:

    • Medicare cost report used to determine cost for each organ type

    • Medicare pays its share of total cost based on ratio of Medicare usable organs / total usable organs

  • UM results: average reimbursement > $40,000 per organ

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PPS-Exempt Units

  • Psychiatric exempt unit

    • cost reimbursed subject to a per-discharge limit

    • limit = 75th percentile cost per discharge

  • Rehabilitation exempt unit

    • through 2002: cost subject to per-discharge limit

    • beginning FY2003: prospective payment system

      • DRG-like groups called case-mix groups (CMGs)

      • 100 CMGs in total, four levels of severity for each CMG

      • Assignment based on...

        • impairment category (stroke, spinal cord injury, head trauma, etc)

        • functional scores (motor skills, cognitive skills)

        • patient age

      • Adjustments for Area Wage differences, DSH (no IME)

      • Additional payment for outlier cases

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Outpatient PPS

  • Ambulatory Payment Classifications (APCs)

    • Began effective 8/1/2000

    • Prior to 2000, cost reimbursed with adjustments

  • Major differences from DRGs

    • measuring the payable encounter

      • inpatient: a single payment for each admission

      • outpatient: multiple payments possible for each visit

    • assigning the encounter to a payment group

      • inpatient: principal diagnosis

      • outpatient: procedure codes

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Outpatient PPS (continued)

  • Current APC structure - number of APCs

    significant procedures 217

    other payable procedures 118

    ancillary tests 41

    visits 8

    drugs and devices 174

  • Excluded from APCs, paid under separate fee schedule

    clinical laboratory

    rehab therapy

    renal dialysis

    orthotics and prosthetics

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Outpatient PPS (continued)

  • Payment

    • Each APC assigned a relative weight

    • CMS sets a national conversion factor, adjusted for area wage index

    • Adjusted conversion factor x weight = payment

    • Outlier payments may be available (not lucrative)

    • No provision for IME, DSH

  • Packaged services (bundling) - not separately paid

    • most drugs and devices

    • medical supplies

    • anesthesia, recovery

    • observation, with some exceptions

    • procedures deemed to be incidental (ex: pulse oximetry)

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Outpatient PPS (continued)

Examples - APC Rates

mid-level clinic visit $53.88

high-level ER visit 241.37

cataract procedure w/ IOL 1,236.48

level I endoscopy, upper airway 51.18

level III endoscopy, upper airway 177.79

electrocardiogram 20.47

level I plain film except teeth 42.56

CT scan with contrast material 250.53

chemotherapy by infusion 200.42

level 1 radiation therapy 87.82

cochlear implant 20,442.02

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Outpatient PPS (continued)

  • Special payment rules

    • surgical discounting: if more than one procedure is performed during a visit, the most expensive procedure paid 100%, others paid 50%

    • drugs:

      • in initial years of APCs, cancer drugs and several other higher-cost drugs were paid separately

      • beginning on 1/1/03, many cancer drugs are now packaged into the infusion payment and the payment for higher-cost drugs was reduced

    • devices:

      • the OPPS legislation provided that expensive devices receiving FDA approval within three years would be paid separately.

      • Initially, there were hundreds of these devices, now a handful

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Outpatient PPS (continued)

  • Transitional Payment

    • Hospitals adversely affected by APCs receive a transitional payment to cover part of the difference between pre-APC payment and APC payment

    • Transition payment is being phased-out over three years (ends 12/31/03)

  • UMHHC experience - Projected FY2003

    • reimbursement based on pre-APC rules $56.2M

    • reimbursement under APCs 42.6M

    • APC loss before transitional payment 13.6M

    • transitional payment 5.3M

    • remaining APC loss $ 8.3M

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HOPD Status

  • To qualify for APCs, sites must be designated as hospital-based outpatient departments (HOPD)

  • Criteria and requirements for HOPD status:

    • Must be under common ownership and control

    • Integrated financial operations, clinical services, medical records, admin

    • Medical staff at site have privileges at the hospital

    • Must hold itself out to the public as part of the hospital

    • Cannot be more than 35 miles from the main campus

    • Must meet federal EMTALA, anti-dumping, non-discrimination rules

  • All but a handful of UMHS sites are HOPD

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Other Outpatient

  • Clinical laboratory - Medicare fee schedule

  • Rehab therapy - Medicare fee schedule

  • Renal dialysis - composite rate per visit

  • Common features

    • no differentiation between hospital based and independents

    • no differentiation based on teaching status or other factors

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  • Many elements of hospital reimbursement are based on aggregate data covering the full fiscal year

    • Resident counts for IME and Direct GME

    • Medicaid-eligible patient days for DSH

    • Cost data for organ acquisition and outpatient transitional payment

      A retrospective settlement is required

  • Hospitals receive cash via biweekly interim payments

  • Settled to “actual” after year-end

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Settlements (continued)

  • Settlement Process and typical timeline

    • Hospital year-end 6/30/02

    • Cost report submitted 11/30/02

    • Tentative settlement by intermediary 3/31/03

    • Audit by intermediary and final settlement 9/30/04

    • Appeal filed by hospital if necessary 3/31/05

    • Appeal settled if possible 9/30/06

    • Legal proceedings if necessary ???

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Medicare Policy-Broad Issues

  • How large can Medicare grow?

    • current federal deficits

    • cost trend in health care

    • aging of the population

  • Competing priorities - distributing federal dollars

    • prescription drug benefit

    • funding for the uninsured and underinsured

    • between provider types - hospital vs physician vs home health vs ...

    • within the hospital line:

      • urban vs rural

      • teaching vs non-teaching

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Medicare Policy-UM Issues

  • Concerns

    • GME funding, especially IME (IME rates are “inherently too high”)

    • Pressure to eliminate rate differentiation

      • HOPD versus freestanding counterparts

      • Disparities between hospitals

    • Area wage adjustment and occupational mix

  • Opportunities

    • Inpatient severity of illness adjustments

    • IME-type adjustment for outpatient

    • Rebasing GME caps on resident FTEs

    • Additional payment for new technology

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  • HHC Reimbursement

    • Department number: 647-3321

    • Director: Tom Marks, 6-7990 (

  • Centers for Medicare and Medicaid Services (CMS)

    • Website:

    • Provider data:

      • recent regulations

      • statistics

      • public use files

    • Other data: links to beneficiary and coverage information, publications by the Agency, Medicare manuals, research, statistics and more